Minor refurbishments of office buildings can in some cases lead to higher returns on investment in upgrading commercial property compared with structural overhauls or floor extensions, according to a new report. 

Built asset design consultancy ARCADIS has found that European cities offered the best return on investment in office refurbishments, with London, Warsaw, Milan, Frankfurt and Amsterdam offering the best returns for major refurbishment investments and Madrid and London topping ROI for minor refurbishments.

Perhaps more surprisingly, however, minor refurbishments – superficial rebranding works to the facade as well as lighting and landscaping along with upgrades to areas such as entrance halls, receptions, lifts, toilets and common areas – were shown in many cases to provide better returns on assets compared with more radical overhauls such as increasing floor area through the re-planning or extension of floor plates or adding extra floors; replacement mechanical, electrical plant, machinery and fire protection systems; replacement of external fabric or major structural changes and upgrades to all areas.

All up, seven cities – Madrid, London, Shanghai, Singapore, Warsaw, Milan and Hong Kong – offered returns on investment of seven per cent or more for minor upgrades to commercial property against only two (London and Warsaw) for major refurbishment.

Furthermore, the report outlines a number of examples (without naming individual buildings) of cases where relatively small investments are expected to generate healthy returns.

Minor improvements to tenant space and some upgrades to landlord areas during a floor by floor refurbishment on a multi-tenanted 1960s office complex in Central Manhattan, for example, are expected to help generate a 13 per cent increase in rent without impacting existing tenant occupancy while works are completed.

In the middle of Amsterdam, meanwhile, a minor refurbishment of a newly vacated 1970s complex along with the updating of a ‘time expired’ central building services plant to improve the complex’s appearance and make its running costs comparable with that of its peers is expected to generate an annualised return of 10.7 per cent with a payback period of under 10 years.

office refurb

Still, the report warns appropriate investment strategies vary according to location and asset and tenant quality.

Minor refurbishments are typically appropriate for more large, multi-tenanted buildings in good locations without top dollar tenants, or as a means of retaining existing tenants where significant volumes of new stock is coming online. More transformational investment strategies, meanwhile, may be better in cities where many older buildings have potential for significant extensions or floor plate replanning, such as London, Frankfurt or Hamburg.

“These European cities all have large volumes of old office buildings that offer enormous potential to be extended or redesigned to increase their returns for investors” ARCADIS Global Financial Institutions sector lead Mathew Cutts said.

“In London, for example, there has been a growing trend for older offices with character and in good locations to be refurbished.  We are also seeing investors interested in investing to create workplace environments that align to support occupier business and brand strategies.”

At the other end of the scale, meanwhile, buildings considered  obsolete in terms of location, layout or performance have limited or no potential for positive returns through expansion and should possibly be disposed of or converted to alternative uses.

Citing Dubai as a case in point, the report says the city has a stock of buildings which are ‘poorly located’ and ‘substandard,’ and that even significant refurbishment works would not add greatly to rental incomes or office capital values.